Both Cochlear Limited (COH) and Ramsay Health Care Limited (RHC) companies have their operations headquartered in Australia. Since the Australian people are majorly old, the demand for quality healthcare is provided by both industries. Notably, both industries’ operational activities involve direct payment of money for all the suppliers providing the health-related requirements and payment to all the employees attached to the firms. Furthermore, the major sources of income for both industries are the receipts from customers who pay for the hearing implant devices in COH and medical services in RHC.
Differences between COH and RHC
COH is a publicly-traded, locally owned company that sells implantable hearing devices like acoustic implants, bone conduction implants, and cochlear implants. Sales of Cochlear implants rely heavily on public health systems for funding. According to Cochlear Limited – Premium Company Report Australia (n.d.), the business employs over 4,000 employees and has operations in the Americas, Europe, and the Asia Pacific. Conversely, RHC is a publicly-traded local corporation that makes money by owning and operating private hospitals. The business employs around 80,000 people and is majorly funded by the government.
Two Common Economy-Wide Factors
The economy-wide factors for COH encompass inflation rates and drastic changes in the interest rates. For instance, according to Cochlear Limited Annual Report [CLAR] (2020), COH is open to interest rate risks in Australia (Lane, C. et al., 2020). On the contrary, according to Ramsay Health Care Limited Annual Report [RHCLAR] (2020), if the interest rates increase or decrease more than the year-end rates, the consolidated entities’ post-tax profit and other inclusive income would be impacted. Another economic wide factor is inflation rates. In COH, a rise in costs as a result of inflation can be detrimental as it depends on the customer’s revenue after-sales. In RHC, whose operation is majorly dependent on shareholder’s equity, inflation can result in lower investments by the stakeholders.
Two Common Industry Factors
Price competition among other companies providing the same type of services is another factor. Both companies would have to increase the cost of production to adjust the prices in the market, and in so doing, affect their financial position. New entrants in the market can also affect the financial capacities of the two companies. For instance, new entrants in the market in Nurotron, a hearing implant provided by an Hangzhou-based company, COH is facing price-related completion because of the market share the compatriot is gaining. With regards to RHC, new entrants in healthcare equipment establish novel inventions and original methods of healthcare systems resulting in increased pricing pressure on RHC.
Two Specific Factors for COH
Product liability risk is one of the prevalent specific factors affecting COH. Case in point, production, and manufacturing of new products involve liability risks. For instance, as a marketer of novel products, certain implants may undergo damages, thus holding the company liable for the losses, especially after the products had been approved for sale. The reimbursement factor can also greatly influence the financial position of the company (Palepu et al., 2020). In this case, since the majority of the COH’s customers depend on the degree of reimbursement from insurers, increased pressure on implant budgets can lead to increased reimbursed prices, subsequently affecting the financial position of COH.
Two Specific Factors for RHC
The healthcare products and services used in the RHC’s chains of hospitals are relying on third-party brokers and dealers for the supply. Third-part involvements, especially in healthcare-related medical supplies carry the risk of delays and disruptions in supplies. As such, losses are incurred when the delays result in sourcing for other products and services, which might be costly and time-consuming, thus leading to changes in the financial position of the company. Another factor related to the company is the lack of current on-market buy-back concerning RHC’S securities (RHC, 2020). A share buy-back often lowers a company’s cash holdings, subsequently affecting the total asset base. In this case, the repurchase will concurrently narrow shareholders’ equity on the liabilities leading to losses.
- To: Bank of Brisbane Head Office Loan Manager.
- From: The Branch Bank Lending Officer.
- Subject: Assessment of the Cochlear Limited.
Total shareholder’s equity at the end of the 2020 financial year is $1,401.5 million, and 30% of the total shareholder’s equity is $560.6 million. Since the loan is based on a 10-year bank loan, which is a long-term repayment period, solvency and liquidity form the major part of the recommendations. In the analysis, the time interest earned from 2018 to 2019 increased from 41.059 to 71.308, though reduced in 2020, which could be related to the effect of the COVID-19 pandemic. Based on the two years before 2020, the ratio designates that the firm has a sturdy ability to make interest payments when due time ensues.
In addition, the debt to total assets ratio specifies an acceptable range. As a consequence of the COVID-19 pandemic, the total liabilities increased to $1174.2 in 2020 from $653.3 in 2019. Fortunately, both current and quick ratios increased from 1.766 in 2019 to 1.807 in 2020 and from 1.148 in 2019 to 1.512 in 2020 respectively.
Moreover, from the analysis, the receivable turnover ratio delivers an upward propensity from 2018 through 2020, increasing from 4.480 in 2018, 4.484 in 2019, and 4.757 in 2020. Before the emergence of COVID-19 in 2020, the firm’s net cash inflows from the investing activities increased from $258.1 to $296.0. In this case, with mass vaccination in 2021, it is projected that the company will come from the negative net cash inflows experienced in 2020 to post more positive figures in a couple of years. Notably, cash return on sales for COH was on a positive trajectory from 0.189 to 0.207 from 2018 through 2019. In addition, free cash flow is from 7.4 in 2019 to 1081.9 in 2020.
In general, COH can preserve a steady cash flow and a robust capability to make interest payments from the above analysis. Repayments of loans are steady and consecutive based on the analysis. Despite the firm’s liabilities being high in the financial year 2020, the negative impact could be related to the effect of the COVID-19 pandemic. Moreover, with mass vaccination on the roll-out and with COH opening its branch in China, it is projected that the company would be in a better position to pay back the loan promptly.
The profitability and the ability to pay loans are the major factors in most investors’ interest. Based on the analysis, RHC provides the best prospects for investing in the year 2020. For instance, in the current year, 2020, RHC has higher ratios of the return on ordinary shareholders (ROS) and return on assets (ROA) with 0.085 and 0.020 respectively compared to the negative values indicated in COH showing -0.224 and -0.121 case-wise. However, in the years before 2020, COH had higher ROS and ROA. Moreover, RHC exhibited higher GPM and asset turnover compared to COH. This could be attributed to the company’s ability to provide medical care, which covers a large customer base compared to COH, whose sales depend on the number of hearing problems and the aged population.
As such, RHC provides higher profitability compared to COH. In terms of risk assessment, COH indicates lower debt to total assets compared to RHC, showing that the company has fewer financial risks than RHC. However, since both ratios are in acceptable ranges over the years and with RHC indicating higher net assets, the general conclusion is that RHC provides lesser risk than COH. From the analysis and the current situation in the market, the net profit of RHC is still higher than COH. Precisely, RHC posted a net profit of $309.2 million as compared to COH which indicated a net negative loss of $ -238.3 million. Therefore, as a recommendation to St. Lucia Investments Company, the firm should consider investing in RHC rather than COH because it is more competent to handle unexpected circumstances, in this case, the COVID-19 pandemic.
Other ratios of concern in the financial analysis of the two companies are the earnings per share (EPS) and price-earnings ratio (PER). EPS is described as the profit generated after-tax deductions divided by the weighted average amount of ordinary shares due (Abhishek, 2019). On the other hand, PER is considered as the current market price for each share divided by the total earnings for each particular share (Robinson, T.R. (2020). According to Abhishek (2019), it is advisable to invest in a firm with a lower EPS, and in this regard, RHC offers lower EPS compared to COH over the past two years (2018 and 2019).
Companies with negative EPS indicate adverse earnings, thus not advisable for future investing. Before 2020, the PER for COH was higher than RHC for two years in a row, suggesting that during those years, RHC was better valued than COH. Moreover in 2020, with negative P/E suggesting negative earnings for COH, RHC is better valued comparatively.
Abhishek, K. (2019) Is Negative Price To Earnings a Bad Sign for Investors?. Web.
Cochlear Limited – Premium Company Report Australia (n.d.) Web.
Cochlear Limited Annual Report (2020). Cochlear Limited Annual Report 2020. Web.
Lane, C. et al. (2020) ‘Cochlear implant failures and reimplantation: a 30-year analysis and literature review’, The Laryngoscope, 130(3), pp. 782-789.
Palepu, K.G. et al. (2020) Business analysis and valuation: using financial statements. South Melbourne: Cengage A.U.
Ramsay Annual Report (2020). Ramsay healthcare limited annual report 2020. Web.
Ramsay Health Care (n.d.) Ramsay Health Care Australia. Web.
Robinson, T.R. (2020) International financial statement analysis. 4th edn. New Jersey, NJ: John Wiley & Sons.